Allco Finance v. Klee
Recent Developments: In December 2014, the district court dismissed the complaint for lack of standing and failure to state a claim. In November 2015, the Second Circuit affirmed the dismissal on alternative grounds.Case Documents

Case Summary
In 2013, the Connecticut General Assembly passed a law that permitted the Department of Energy and Environmental Protection (DEEP) to solicit proposals for energy from renewable generators. If DEEP found that proposals met certain statutory requirements, DEEP could require the State’s electric distribution companies to enter into long-term contracts for up to four percent of their total energy requirements.

After conducting the RFP, DEEP announced that it had selected two of the 47 proposals it received and directed the State’s electric distribution companies to execute contracts with those developers. Plaintiff Allco Finance’s proposed projects were rejected, and the company sued to invalidate the winners’ contracts.

Plaintiffs alleged that the winning contracts were the product of unlawful state action. According to their complaint, the Federal Power Act grants FERC exclusive jurisdiction to regulate wholesale electricity prices. Plaintiffs alleged, however, that the State “fixed the wholesale price of energy” when DEEP directed Connecticut’s distribution companies to enter into contracts with terms, including price, that DEEP selected. Under the Supremacy Clause doctrine of field preemption, Plaintiffs argued that DEEP’s actions are invalid and must yield to FERC’s exclusive authority.

Plaintiffs also made the related claim that DEEP “compelled” the distribution companies to execute contracts at specific prices. According to the plaintiffs, this compulsion conflicted with the FERC’s regulatory framework, which requires that wholesale energy contracts be freely negotiated between buyers and sellers. This state scheme is therefore preempted under the Supremacy Clause doctrine of conflict preemption.

The district court rejected the plaintiff’s contention that the state fixed the contract prices, and instead concluded that the state “play[ed] no role in determining the price offered by bidders” in response to the RFP. Although utilities were “compelled to accept the prices in bidders’ offers,” which were selected by the state, the sellers’ offer prices were not constrained by state law. The court therefore held that the state’s scheme did not set prices, its order to utilities directing them to sign the contracts was within the state’s authority to regulate its utilities, and therefore the state’s order did not amount to wholesale ratemaking and is not field preempted. The court did not address the conflict preemption claim. It also held that the plaintiffs lacked standing.

The Second Circuit affirmed the dismissal on alternative grounds. The court held that PURPA forecloses remedies under section 1983; that the plaintiff had failed to exhaust its administrative remedies, a prerequisite for bringing an equitable action under PURPA; and that the plaintiff lacked standing to bring an action seeking to void contracts awarded to its competitors.

Second CircuitDecisionSecond Circuit Decision (Nov. 6, 2015; amended on Dec. 1, 2015 to clarify that the panel did not accept the appellant’s preemption theory, see footnote 4)

Allco Finance v. Klee (filed April 2015)
Recent Developments: Allco filed its complaint in April 2015. The court dismissed the complaint in August 2016. An appeal is currently before the Second Circuit.Case Documents

Case Summary
Allco, a renewable energy project developer, challenges a proposed RFP issued by Connecticut regulators in conjunction with regulators in Massachusetts and utilities in those two states and Rhode Island. The proposed RFP solicits offers for renewable energy and transmission to deliver renewable energy, including projects that “may enable parties in each state to achieve their respective state’s clean energy goals more cost effectively than if each state were to proceed unilaterally.” The proposed RFP seeks renewable energy and/or renewable energy credits (RECs) from sources that deliver energy into the regional New England grid.

Allco argues that the deliverability requirement violates the dormant Commerce Clause because it amounts to “regional protectionism.” The supposedly facially discriminatory requirement prevents Allco from submitting bids for RECs from its facilities in Georgia and New York.

Allco also asserts claims under the Supremacy Clause, reiterating its argument (rejected by a federal district court in December 2014 in the above proceeding) that state regulators cannot “force” Connecticut utilities to sign wholesale energy contracts, because such compulsion would be preempted by the Federal Power Act. Second, Allco claims that Qualifying Facilities (QF) under PURPA have “specific protected interests as [] Congressionally-created participant[s] in the Nation’s energy markets.” The proposed RFP violates those interests by allowing non-QFs to submit offers, restricting the RFP to facilities larger than 20 megawatts, and charging all participants a fee. Allco states that such “burdensome state regulatory conditions” are preempted by PURPA, 16 U.S.C. 824a-3(e).

Allco Finance v. Klee (filed March 2016)
Recent Developments: The district court dismissed the complaint in August 2016. The Second Circuit affirmed in June 2017.Case Documents

Case Summary
Although this is the third case that Allco has filed in the Connecticut federal district court in three years, it largely rehashes earlier arguments about the state’s renewable energy procurement program. The district court dismissed two complaints in a single decision, rejecting Allco’s preemption claim about the state’s renewable procurement program and its dormant Commerce Clause claim about the state’s renewable portfolio standard (RPS).

In June 2017, the Second Circuit Court of Appeals affirmed the district court’s dismissal. It concluded that Connecticut’s procurement program was not preempted by the Federal Power Act and that the state’s rule that renewable energy credits (RECs) used for RPS compliance must be from resources in New England or an adjacent region did not violate the dormant Commerce Clause. The opinion is particularly significant because it is the first federal court decision to discuss the scope of the Supreme Court’s 2016 Hughes decision. The Second Circuit’s interpretation of Hughes will inform district courts that are weighing motions to dismiss claims about zero emission credits (ZECs) for nuclear plants.

1) Preemption Claim about Connecticut RFP
The plaintiff renewable energy generator argued that a state law requiring regulators to conduct an request for proposals (RFP) for renewable energy “compels” utilities to enter into wholesale purchases. This compulsion, the plaintiff argued, intrudes on FERC’s exclusive jurisdiction over wholesale sales and is therefore preempted by the Federal Power Act. In November, the Second Circuit had issued an injunction that prevented Connecticut regulators from approving contracts. It then lifted the injunction the day after oral argument.

The Second Circuit panel rejected plaintiff’s preemption argument for three reasons: 1) the plaintiff failed to allege facts sufficient to support its contention that the FRP “entails the kind of ‘compulsion’ that might sustain a preemption claim of this sort;” 2) there are legally relevant distinctions between the RFP and the Maryland program that the Supreme Court invalidated in Hughes; and 3) the RFP’s “incidental” effects on the wholesale market do not amount to impermissible regulation of that market.

On the first point, the panel found that the RFP does not obligate utilities to actually sign contracts with a winning bidder. In fact, the RFP specifies that utilities “will be responsible for negotiation and execution of any final Power Purchase Agreement.” The court’s opinion does not speculate whether or not an RFP could be preempted if it did, in fact, compel a utility to sign a contract with a specific generator.

The Court then rejected the plaintiff’s argument that the RFP was “economically identical” to the contracts at issue in Hughes. In that case, Maryland required utilities to sign contracts with a generator. Under the contracts, utilities would pay the generator the difference between PJM auction prices and a price specified by state regulators.

By contrast, the Second Circuit found that Connecticut had not “sought essentially to override the terms set by the FERC-approved auction” nor did it “require transfer of ownership through the FERC-approved auction.” Connecticut’s bilateral contracts are subject to FERC’s review and are “precisely what the Hughes court placed outside its limited holding.” Moreover, the RFP will not “produce contracts that violate the bright line laid out in Hughes: the RFPs do not, for instance, require bids that are ‘tethered to a generator’s wholesale market participation’ or that ‘condition payment of funds on capacity clearing the auction.’

The decision provides fodder for both sides of the pending ZEC cases. On the one hand, New York and Illinois will point to the court’s emphasis on the connection between the state program and a FERC-regulated auction. They have argued that their ZEC programs are not preempted because they do not require nuclear plants to sell into a FERC-regulated auction and therefore do not cross Hughes’ “bright line.” On the other hand, ZEC opponents will highlight that the panel found it “significant” that FERC has the final say on any contracts that result from the RFP. This distinguishes RFP contracts from ZECs, which the states argue are not subject to FERC’s review.

The panel’s third reason for dismissing the preemption claim is that the state’s RFP terms do not amount to impermissible regulation of the wholesale market. Rather, the panel concluded it was “settled law that specifying the sizes and types of generators that may bid” and setting other terms of the RFP is “well within the scope of Connecticut’s power to regulate its utilities.” While the procurement may have effects on the wholesale market, those effects are not evidence that the state has infringed on FERC’s exclusive jurisdiction over wholesale rates.

2) Dormant Commerce Clause Claim about Connecticut RPS
This case includes a separate claim about Connecticut’s renewable portfolio standard (RPS). Connecticut law requires that RECs used for compliance be from a resource that is located within the ISO-NE region or is in an adjacent region and delivers energy into New England. The plaintiff asserted that these geographic restrictions on eligible RECs amounted to impermissible discrimination under the dormant Commerce Clause.

The panel emphatically rejected the claim. Importantly, the court concluded that for purposes of the dormant Commerce Clause eligible RECs are a different product from the plaintiff’s RECs generated in Georgia. ““RECs are inventions of state property law . . . and Connecticut has invented a class of RECs that differs from” RECs produced in Georgia. The panel held that the two types of RECs are not “similarly situated” under the Supreme Court’s 1997 opinion in General Motors v. Tracy.

The decision also endorses the purposes behind the state’s REC requirement. It found that “Connecticut consumers’ need for a more diversified and renewable energy supply . . . would not be served by RECs” from Georgia. In addition, the program serves the state’s “legitimate interest in promoting increased production of renewable power generation in the region, thereby protecting its citizens’ health, safety, and reliable access to power.”

While the panel recognized that there is a national market for RECs that does not distinguish on the basis of geography, it found that the needs of Connecticut’s local energy market permits the state to create a separate class of RECs. The panel concluded it would not serve the pro-competitive purposes that underlie the dormant Commerce Clause to eliminate Connecticut’s requirement.